Valeant’s latest tax-cutting tactic, courtesy of Luxembourg
Valeant is famous for wringing cost savings out of its buyouts, and its tax-advantaged Canadian domicile helps on that front. Now, it’s leveraging another address to pare down Salix’s tax bill by more than $560 million. But how?
According to documents seen by The Wall Street Journal, the strategy used by CEO J. Michael Pearson centers on a $16.5 billion loan from a Luxembourg-based subsidiary to Salix’s stateside holding company, which can deduct the interest from its U.S. income. The result? An anticipated $562 million in savings by 2020.
While high U.S. tax rates once had American companies looking to snap up foreign rivals and move abroad, new, stricter rules on those so-called inversions have helped increase the flow of deals in the other direction. Companies such as Valeant ($VRX), Endo ($ENDP) and Allergan ($AGN) and have all used their lower rates to their dealmaking advantage, coming to the bargaining table armed with the potential for tax savings.
And Salix is not Valeant’s first go-around with the practice. Since scoring a lower tax rate in its 2010 shift to Canada, the company has nabbed drugmakers like Medicis and Bausch & Lomb. Most recently, it agreed to pick up Sprout Pharmaceuticals, maker of controversial female libido drug Addyi.
“There is no question that we would not be in the same place we are in today if we had a higher tax rate,” Valeant’s former finance chief, Howard Schiller, testified at a July congressional hearing, as quoted by the WSJ.
Others, too, are looking to follow in its footsteps–including Horizon Pharma ($HZNP), which moved to Ireland after buying Vidara Therapeutics at the height of the U.S. tax inversion backlash. The company is currently embroiled in a hostile pursuit of California’s Depomed ($DEPO), which forked over 38% of its profits in taxes last year.
A lower tax rate “gives you synergies that allow you to compete when it comes to valuing assets,” Horizon CEO Timothy Walbert told the Journal in July. “We think about it as leveling the playing field.”